August 13th, 2016 by AHB
Ok, the title is a tad bit alarmist I’ll admit, but I came upon an article about buying a house vs renting a house and at first I disagreed, then agreed, and then realized there is a tightrope that must be walked before picking a side to fall in.
I have a real estate license, or rather had one, as I believe it has expired by now, so I tend to use all my training and schooling in real estate to defend the “It is always better to own a house than to rent one” mantra. I often do this without thinking. It doesn’t take a license though. Many see owning a home as a sign of success in life. Much like driving a Cadillac Escalade when you know you’ll almost never fill more than one seat in the truck.
Buying does has it’s advantages, but the place you are at in life, and the lifestyle you current live makes a GIGANTIC impact on whether you can realize those advantages. For example, will it cost you more to live in the house you want to buy? Most people upgrade when they move into a home that they want to own. I saw a sale on a billboard this weekend stating “2007 Mustangs from $14,000” – but when you add tax and options on, will it still be $14,000? Americans are hardly realistic when it comes to purchases. We live up to our means and then freak out when something like a car tire or A/C repair throws us over the top of our spending limit.
Let’s take a quick look at some of the most highly touted benefits to owning a home:
Buying A Home Gives You Tax Deductions
Most of the money paid in the first years of a mortgage, are interest, and interest is tax deductible. Other items such as Private Mortgage Insurance (PMI) can also be tax deductible.
This is probably one of the biggest benefits to owning a house. But first, what is the difference in payment between your mortgage payment and the cost to rent a similar house? In the 2007 market, this could be almost 200%. What might cost $1,200 a month to rent, may very easily cost $2,400 a month to own. Especially once you consider items like property tax and HOA fees. At the end of the year, if you would have saved $4,000 in taxes paid to the government, but paid $12,000 more. You lost $8,000 dollars. Owning a house did not save you any money on your taxes at all.
Appreciation – Real Estate Always Goes Up!
Historically, real estate does “go up” over time. And if money is guaranteed to be secure and life changes such as disability and losing a job will not affect your cash flow, then you can pretty much count on this. In 2005, Arizona property appreciation reached a high of over thirty percent!
When you’re making over thirty percent return on your investment, life is great. However when foreclosure notices start to go up almost 250%, everyone starts selling and nobody is buying houses anymore, and when things get so bad the president has to deal with the idea of a federal bailout, the reality of life has a way of “crashing” down on you.
The reality of this benefit is that if your home is by no means a burden to you financially and you can weather periods of 10 to 20 years, you can be reasonably certain your home will be a decent investment. However the lack of stability of the job market in the dot com boom, the real estate bubble, and other sectors has proven that most people’s jobs are NOT safe. Our rising poverty issues also show that financial freedom is not something the young American is born into either.
Equity – Owning A Home Allows You To Build The Equity That Accompanies Appreciation
While the first decade of payments will merely chip away at the principle owed on the loan that finances the house you “own” with the bank’s blessing, appreciation helps sweeten that “free money”. If the home is appreciating at even a snail’s pace and you are still making payments, it’s a fact that you will build equity.
But what happens when the market begins sloping down? We accept that a car loses a large portion of its worth when it’s driven off the lot. But we find it harder to accept it when the house we bought for $300,000 last year.. is now only worth $240,000 – and worse off, won’t even sell at $230,000 because the true “price to sell” is even lower. If you are like most homeowners, you didn’t have $60,000 or $70,000 for a down payment. If this was your first home, you probably went in with 100% financing, or something very close to that.
And if I’m addressing you in a nutshell, your next Google Search may very well be for “adult diapers”. Negative equity in a house is a life shattering experience. With a car, financed over a couple years, it’s fairly easy to get out from under a bad purchase. But when you’ve wrapped up your entire life and married a piece of real estate, you begin to see what I mean by “what you ‘own’ with the bank’s blessing”. And the bank is a fickle mistress. The reality is that equity goes both ways. While it most normally accompanies upward trends, it most definitely can go down. We’re seeing this in the 2007 real estate market here in Arizona.
Owning Your Home Brings Security And Stability
When you own your own home, you don’t have to worry about those heavy-footed folks upstairs, or the loud apartment next to you. Like most people you have 7,500-10,000 square feet of freedom! You can paint, tear down, rebuild, and do just about anything so long as you follow your HOA guidelines and zoning rules. With the added benefit of appreciation and equity growth, these feelings of security and stability from owning your own home increase even more. You may never have to move again!
And many buyers buy into this. I know I have. But the fact is that the freedom of ownership is only as real as the ability to sell in current market conditions. Most homeowners, it is safe to say, are heavily tied to their homes. They upgraded, maybe counted in the tax savings to justify the higher per month costs. But your home can’t keep your income stable and secure and it can’t control the market, it just helps give you comfort that you know where you’ll lay your head tonight.
When your financial situation becomes threatened, all this comfort, stability, and security flies right out of the window. While you do get benefits from “owning your home”, you’re still renting it from the bank until you own it outright. Owners in the 2007 market are now abandoning their homes because they won’t sell. What brought peace of mind is now the reason for more stress than ever.
So Are You Saying That Renting Is Better Than Buying?
I’m saying it’s a very careful line you have to walk. Can you afford to run into another 2007 market? What if things only get worse? Could you weather that? The truth is that most folks cannot. While renting is not a guaranteed safe zone, it still prevents much less room for potential loss than ownership can. Owning a house is indeed one of the biggest decisions you’ll need to make in your life.
If you’re hedging your bets that the market remains steady and up for a few years until you can rake in some hefty equity and appreciation, you probably shouldn’t be buying. Rent and save the difference.
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